Abstract:Since 2008 the Organization for Economic Co-operation and Development (OECD) countries have been in recession and the gross domestic product (GDP) growth in developing world has significantly decreased. The economic slowdown started from the United States of America (USA) and spread all over the world. Our paper examines the way East-Asian countries are coping with the global financial crisis facing major challenges as falling commodities prices, contracting export markets, drop in stock market prices, and increasing unemployment. Based on literature review and a study case (Singapore), it argues that many East Asian countries have weathered the global financial crisis better than other countries of the world. Despite the crisis, some of these Asian countries pressed ahead with their economic and financial reforms including liberalizing their currencies, to ensure the long term competitiveness of their economies. However, the global financial crisis seriously weakens growth and profits worldwide, including East Asia.

IntroductionSince the end of the twentieth century much has been debated and written about the financial crises, in the academic environment and scientific research circles as well as in the popular press. Today’s global financial crisis seems to be the deepest recession since World War II. The aims of our paper are to undertake an analysis of the factors leading to recent financial crises and to examine the way East Asian countries are coping with these crises. In line with these objectives, the paper is designed to answer to the following questions: What were the policy responses to the crises? What lessons can be learnt? We address these questions by reviewing the literature and presenting a study case. The first section of the paper discusses the background of the global financial crisis. The second section emphasizes the characteristics of the last two crises in East Asian countries and presents the case of Singapore. In the concluding section some observations are made from the authors’ perspective.

The background of the global financial crisis The roots of the global financial crisis lay in the American subprime mortgage market. As the relatively long expansionary monetary policy kept the interest rate low and encouraged borrowing for real estate, financial institutions provided loans to people who were not capable of repaying them- the subprime borrowers [7]. Financial institutions financed their portfolios with less and less capital (increase in leverage), obtaining higher rates of return on that capital [3].Early warning signals of the crisis were: abundant liquidity, excessive and imprudent credit expansion, rapid increases in property asset prices (e.g. US property prices rose 50 % between 2001 and 2006). The diffusion of the crisis from the financial sector to the real economy manifested itself early in trade and retail [18] Despite massive interventions of national governments, the supply of credit has shrunk, the stock markets have suffered huge losses, and many banks and companies went bankruptcy. As the crisis spread all over the world and is expected to be deeper and more prolonged than previously anticipated, a global recession gained plausibility. According to the Asian Development Bank, the major industrial countries are already in or close to recession [19]. In 2009, the Group of 20 (G-20) Summit promoted the idea of moving towards a “global new deal” based on the establishment of a set of new international co-operative arrangements across national borders. Once again, the world financial system is endangered and the need to create an international policy co-ordination is essential for the effective protection of the global financial architecture. In this respect, B. Rhodes, the chairman of Citibank, argues that there are four key priorities for the G-20 as follows [16]: Emerging markets. The exceedingly funding environment exacerbated by heavy refinancing needs in the near term, the deleveraging and repatriation of funds, the retrenchment by private-sector creditors are major challenges for the emerging markets.  Financial protectionism and economic nationalism. As loss of liquidity represents a fundamental problem not only in specific countries but also on a global scale, some authorities have recently instituted local requirements without international co-ordination that may trigger similar responses by other authorities (e.g. protectionist barriers).  Regulation. Internationally coordinated approaches that led to more effective international regulatory norms and accounting standards are essential to retain the benefits of the international market in financial services.  Restoration of liquidity. The restoration of sufficient levels of trade financing globally is urgently required. Cooperation and collaboration among all affected countries should build upon the favorable momentum created by the G-20 Summit [20]. In this respect, East Asia represents a good example.

East Asia: from one financial crisis to another One of the most contagious of recent financial crises, the East Asian crisis of 1997 was largely unanticipated. Some countries were hit directly (e.g. Malaysia, Indonesia, Thailand, South Korea, Philippines) while others were severely affected (e.g. Singapore, Taiwan, Hong Kong). Thailand was at the epicenter of what has been called the first modern financial crisis in the age of globalization. In the last decade different opinions related to the causes of the crisis and key policy responses have been presented in the literature (Table 1). Some of the most visible defining characteristics of the crisis of 1997 were the following [1, 4]:• A rapid diffusion of the crisis from one country to all countries in the region. All began as a speculative attack against the Thai baht in July 1997 and quickly spread in other East Asian countries. • A different economic and financial impact of the crisis in the region. Some economies (e.g. Thailand, South Korea) were affected much more than others (e.g. Singapore, Hong Kong).• A different governmental approach regarding the measures taken to diminish the effects of the crisis. As the impact of the crisis was differential, the policy responses were different. • A previous gradual deterioration in economic fundamentals (e.g. budget deficits, expansion in money supply, inconsistent fiscal and monetary policies with fixed exchange rates, reserve losses). In Thailand several financial companies went bankruptcy immediately prior to the speculative attack against the baht. • A dramatic decrease of the GDP growth. Malaysia experienced 7.3 % increase in 1997 and 7.4 % decrease in 1998. In Thailand the decrease was 10.5 % in 1998. • A previous lending boom. There was a significant increase in bank lending to the private sector and credit to this sector as a percentage of GDP rose sharply. Most of the debt inflows took the form of inter-bank lending. • A sharp fall in asset prices and currency values in several countries in the same time. Between July and October 1997, the baht lost 40 % against the US dollar, the Indonesian rupiah about 40 %, the Korean won 35 %, the Malaysian ringgit and the Philippine peso about 27 %. Soon, Taiwan and Singapore devalued their currencies in what is called “competitive devaluation”. Hong Kong remained the only country that successfully defended its currency against the speculative attacks. • A large drop in the traded equity prices. The stock markets plunged as the currency crisis expanded in East Asia. • A pre-crisis approach towards financial liberalization. In most countries governments started to eliminate entry barriers and discriminatory treatment of foreign competition in the banking sector. • A significant short-term external debt. In some cases (e.g. Thailand, Philippines, Indonesia) the level of short-term external debt exceeded the level of international reserves. • A structural distortion caused by implicit guarantees to banks. In general, these guarantees came either from the local treasury or from international financial institutions. • A severe decrease in private external capital flows to the countries of the region. During the crisis large amounts of short-term capital left East Asian countries. • A positive foreign direct investment (FDI) inflow in the region. In 1997, the FDI inflows remained at a level similar to that of 1996 in most countries affected by the crisis.

Table 1. Causes of the Asian financial crisis in 1997 and key policy responses No. Authors Causes of the crisis Key policy responses 1. Moreno R., Pasadilla G., Remolona E. Distorted incentives that led to excessive risk-taking and financing of asset price bubbles I. Short-run policy responses – the macroeconomic policy has two main objectives:• restoring growth;• stabilizing exchange rate expectations– the monetary policy is designed to stabilizing exchange rate expectations by curbing inflation– the fiscal policy is designed to supporting growth and the financial sectorII. Long-run policy responses a) financial reform, supervision and regulation– the financial sector reform aims at:o allocating the credits strictly according to business criteria;o strengthening of the supervision of banks and other financial intermediaries;o incorporating standard banking rules and procedures;o allocating adequate capital to absorb the risks being born;o managing of market risk to consolidate the various exposures in banks’ entire balance sheets – transparency b) exchange rate policies– managing floats with wide fluctuation bands or creating a basket peg (= an implicit guarantee against exchange rate risk)c) policies towards capital flows– the shift from short- to long-term maturity instruments2. Berg A. 1. Fundamental structural and macroeconomic deficiencies caused by the interaction of weak domestic financial institutions with large capital inflows.2. Domestic and external financial vulnerabilities.3. Financial panics. I. External finance– the provision of external finance is needed to constitute adequate reservesII. Fundamental systemic reform– the recapitalization of the banking sector– the closure of insolvent financial institutions– the establishment of a new regulatory environment designed to encourage a faster recapitalization of the financial sector– the injection of public capital into the financial system– the implementation of measures to strengthen regulation and supervision in the financial system– the adjustments needed to monetary and fiscal policy Source: [2, 13]

The way East-Asian countries coped with the crisis of 1997 allows us to identify the lessons that these countries learned from their experience [1]. Firstly, vulnerability should be prevented by building up of leverage/debt financing and by avoiding the financing of debt with foreign currencies exposures. Secondly, governments have to implement slower but better quality growth strategies based on a higher absorption of internal resources and on a higher value added. Thirdly, inappropriate sequencing of financial liberalization might constitute a cause of vulnerability. Creating a reliable and strong banking system should be subject to market discipline. Fourthly, risks are dissipating if alternative financing mechanisms are well-functioning (e.g. stock market). Fifthly, the misalignment of exchange rate has to be avoided due to the incompatibility between independent monetary policies and free capital flows. Sixthly, temporary capital controls are needed, especially on capital inflows. Finally, the International Monetary Fund (IMF) policies have worked in spite of their harsh social impact. Under IMF supervision structural reforms were adopted and put in practice (e.g. strengthening of regulation in the financial system according to internationally accepted standards, reducing fiscal deficits, deleveraging, restructuring of the big industrial conglomerates). However, some of the IMF measures proved to be counterproductive. Most of the Asian economies were experiencing robust growth when the subprime crisis first erupted in July 2007. In the first half of 2008, despite an inflationary evolution of their economies, East-Asian countries continued to grow, leading to suggestion that they had in fact decoupled with the developed economies. However, since the beginning of the second half of 2008, there have been signs of a marked slowdown in many East-Asian economies. They faced major challenges as falling commodities prices, reductions in external financial inflows, drop in stock market prices, reduction in export earnings and increasing unemployment [14]. These economies have also begun to feel the impact of the global crisis because of the strong financial linkages between Asia and United States [5]. Previously confronted with a financial crisis, the East Asian countries have searched for counterweight strategies that allow them to avoid financial overdependence in a period when the global financial architecture is being called into question [17]. The early twenty first century witnessed the increased efforts of these countries to strengthen financial cooperation by creating regional institutions and arrangements. Since 2001 the Chiang Mai Initiative has been launched to provide liquidity support for countries that have short-run balance-of-payments deficits. In May 2005, East Asian countries established an $80bn emergency fund to support crisis-hit nations. Along with the Chiang Mai Initiative, these countries created the Asian Bond Fund Initiative in 2003, aiming at bringing back the huge amount of Asian foreign reserves traditionally saved in Europe and at shielding the region from external vulnerabilities by building more robust capital markets. Moreover, in 2006, East Asian governments began to study the possibility on an Asian Currency Unit. The current global financial crisis has manifested in East Asia in the beginning of 2008. A selective review of the evidence is given below:• Leading exporters such as China and South Korea (e.g. 33 % drop in export value in January 2009) have started to feel the impact of the economic downturn. Since the end of the 1980s, the vast majority of Asian economies have built up their production capacity in order to meet the demands of the Western countries. The dramatic reduction of the Western demands has led to excess capacity in Asian countries. Now, these countries are trying hard to fill the gap by increasing the consumption level of their people. • The external debt differs from one country to another. One of the top export-driven economies, South Korea accumulated an external debt of about 40 % of GDP. Its household leverage is one of the highest in Asia, meaning that, South Korea has to stimulate domestic demand. Much of its domestic debt has been extended by over-leveraged local lenders. The South Korean banks are highly dependent on the inter-bank lending market, being exposed to major foreign funding pressures. Also, the massive net equity outflows surpassed $30bn in 2008. As a consequence, the Bank of Korea had to provide $55bn of liquidity to local banks in order to repay their short-term foreign debt, in the last quarter of 2008. • The Asian central banks reserves are no longer growing at the rapid tempo that they were in the recent past years. In the current risk-averse environment they increased their focus on core European sovereigns (e.g. France, Germany) and they have bought more treasury bills, especially from central banks that defend their currencies (e.g. Bank of Korea). There is also growing Asian appetite for holding more euro-denominated assets [12]. Some Asian central banks have been moving a bigger proportion of their reserves into more liquid, shorter-dated products (e.g. treasury bills). • There are obstacles to institutional trading due to the strong localization of Asia’s stock markets, regulatory idiosyncrasies and extensive bureaucracy. By adopting fundamentally different structures to their market counterparts in Europe, the Asian markets provide both expensive and highly constrained access to liquidity. Parochialism and protectionism are features of most Asian stock markets. Also, the idea of synchronization and opening up of borders is almost unthinkable now in Asia. However, starting from the 2015 vision of a more integrated Association of South-East Asian Nations (ASEAN) capital market, with harmonized rules, regulations and practices, the ASEAN has announced the creation of a direct market access e-trading link to the Malaysia, Singapore, Thailand, Indonesia and Philippines stock exchanges. • The increasing penetration of Islamic finance products in East Asia and Malaysia’s growing importance as an Islamic financial hub (the world’s largest sukuk market) are the results of the development of competitive products and structures for both corporate and retail customers in Malaysia. The Malaysian financial institutions strongly believe that offering Islamic products gives them a competitive advantage over other similar institutions. They have already demonstrated their capacity in using the Islamic concept of wa’ad (a non-binding promise) and the sharia law (according to this law, the details of the promise are not fixed as they are in other contracts) as a springboard for financial innovation and flexibility (e.g. the first corporate bond based on ijarah (leasing) issued in 2004 and the first mudharabah Islamic bond issued in 2005). • Political tensions continue to rock Thailand after the former Prime Minister, T. Shinawatra, lives in exile due to a corruption conviction. Combined with tumbling exports (e.g. 25 % drop in export value in January 2009) and a decline in business confidence and investment, these tensions are affecting Thai’s economy. Household debt has been creeping up over the past years and the private consumption has declined in the last months. As the banks are financed entirely by domestic deposits the exposure to foreign capital flows is only through the stock exchange. • Capital flows to East Asian countries have become more volatile, especially to those running large external deficits. This is why their currencies have come under pressure and their central banks had to intervene. • Several stimulus packages were launched in many Asian economies. In Thailand a $3.3bn stimulus package aims at promoting discretionary spending by low-income groups. In the same direction, South Korea launched a $49.28bn fiscal stimulus to increase consumer expenditure.While country circumstances differ in East Asia, a major policy dilemma has occurred in order to respond to weakening growth and financial turbulence. Discretionary fiscal policies are used in countries with a strong fiscal position and fiscal restraint in those that have recorded rising food and fuel subsidies, and higher inflation. In spite of the fact that the discretionary fiscal policy responds more weakly and less quickly than the monetary policy, it is more timely [9]. By contrast, in other East Asian countries monetary policy tightening combined with exchange rate flexibility has proved to be a necessary first step. Based on the fact there are many similarities between the 1997 crisis and today’s crisis, the East Asian countries have weathered the global financial crisis better than most European and American economies. In essence, East Asian economies have been responding to the challenges of the current crisis through monetary policy easing, financial sector policy, fiscal expansion and international and regional liquidity arrangements. Without being immune to the current crisis, East Asia has successfully coped with the global downturn until now. In this respect, Singapore is a valuable example. Singapore is one the most important financial centre of Asia. Since the breakdown of the Bretton Woods system in 1973, Singapore has faced three major crises. In 1985, Singapore experienced recession and in 1997, suffered the contagion effects from the Asian financial crisis. In 1997, the prolonged and severe Asian financial crisis affected the Singaporean economy in various ways as follows:• the significant decrease of Singapore’s exports due to the diminished regional demand;• the loss in competitiveness of the Singaporean goods in the third-country markets in comparison with other merchandises produced in the regional economies;• the weakening of Singapore’s banks operating in the region caused by the non-performing loans;• the setback of the outflow of Singapore’s investments to the region;• the losses suffered by the Singapore’s brokerage firms when the Kuala Lumpur Stock Exchange imposed new trading rules; • the fall of the stock market (the Straits Times Index lost 60 % in a fourteen-month period) and of the property market. In spite of the financial turmoil, Singapore managed to maintain a relatively favourable economic performance in East-Asia. The growth of its gross domestic product (GDP) fell from 8.9 % in 1997 to 0.3 % in 1998, but was one of the highest in Asia (Table 2). The roots of the Singapore’s successful resilience in the face of the Asian financial crisis were the following [15]:• the depreciation of the Singapore dollar against the American dollar, the Japanese yen and the major European currencies combined with the appreciation against the baht, rupiah, peso, ringgit and won. As a consequence, the exchange rates were relatively stable during the crisis. The Monetary Authority of Singapore (MAS) judiciously managed the nominal effective exchange rate.• the maintenance of strong economic fundamentals: wise government policies, good corporate governance, low inflation rates, high saving rates, high inflow of direct foreign investment, sound financial system, healthy and well-capitalized banking sector, large account surpluses, low foreign debt, important foreign exchange reserves ($75bn in 1998). The credibility of policymakers preserved the investor’s confidence throughout the crisis.• the adoption of a flexible wage system. The National Wages Council, comprising the representatives of employers, unions and government, set annual wage guidelines followed by the public sector and unionized private sectors of the economy. • the control on bank lending in the Singapore dollar. The local financial institutions implemented the regulations imposed by the Monetary Authority of Singapore which discouraged the internationalization of the Singapore dollar.

Based on its previous experience, Singapore has understood the need to prevent the feedback loop between its financial system and the real economy. In the wake of the Asian crisis, the Singaporean economy has undergone substantial restructuring in the last decade. This is why Singapore has:– put in place the necessary legal, regulatory and tax framework;– improved external competitiveness;– maintained high saving rate;– promoted domestic competition;– encouraged entrepreneurship;– enhanced labor market and wage flexibility;– reduced business taxes and costs; – started to implement concerted monetary, fiscal, trade and regulatory policies;– made prudent provisions within its stable banking system against losses on exposures to the US subprime related assets;– used the exchange rate as an intermediate target to achieve low inflation and sustainable growth [10];– diversified its manufacturing and services sectors;– often used fiscal policy to counter adverse external shocks [11];– run large current account surpluses in excess of 15 % of GDP [6]; – carefully monitored the levels of debt without over-regulation.As a small open economy, Singapore is vulnerable to external shocks, especially those of the surrounding region, due to its close integration with the so-called ASEAN-4 (the regional economies of Malaysia, Indonesia, Thailand and Philippines). Thus, the Singaporean economy was not insulated from the regional economic downfall, being commercially and financially connected with these countries (e.g., the ASEAN-4 accounted for nearly a third of Singapore’s total exports). As a consequence, Singapore’s policymakers decided to broaden the financial services. In order to develop its own nascent Islamic financial industry the MAS inaugurated the $130m sukuk bond (the equivalent of Singapore Government Securities) in the beginning of 2009, but Indonesia, Japan and Thailand have all delayed sukuk issues because of weak market conditions. Some specialists considered this movement as a sign of the seriousness of Singapore’s ambitions to compete with Malaysia as a regional Islamic financial hub, but H. S. Keat, managing director MAS, stated that the move was necessary to ensure the dynamism of the Singaporean financial centre [8]. Moreover, the Islamic finance proved its resistance to many of the excesses currently troubling Western finance. Singapore reached a good economic performance in East Asia between 2005 and 2008. The growth of its gross domestic product (GDP) decreased from 8.4 % in 2006 to 7.8 % in 2007 and 1.1 % in 2008 (Table 3).

Until April 2009, the city-country has coped well with the current global financial crisis. In short, the success of Singapore is based on its strong fundamentals, including fiscal sustainability and macroeconomic stability.

ConclusionsThe Latin American crisis of the 1980s, the Asian financial crisis of the 1990s and today’s global crisis require an intensive co-ordination between key players as national governments, central banks, international financial institutions (e.g. the World Bank, the IMF) and private creditors in order to identify multilateral cross-border solutions designed to resolving problems that threaten the world financial system. With their rapid economic ascent, East Asian countries have become increasingly aware that their positions within the global economy have changed. Since the 1997 Asian financial crisis, these countries have pushed for greater influence within international financial institutions. Also, they agreed on the implementation of several regional financial arrangements. The current crisis has shown how an important role the international financial architecture plays.

The current financial crisis has occurred at a time when many East Asian economies enjoyed years of strong growth. In a turbulent time, East-Asian countries need to take care of themselves by implementing different initiatives such as:• developing intra-Asia trade and investment; • improving regional financial cooperation;• stimulating weak domestic consumption; • creating free-trade areas etc. As their macroeconomic fundamentals are much healthier in 2009 than in 1997, the East Asian countries are coping much better with the financial turmoil than other countries. Based on their experience, two key measures have proved to be necessary in a period of crisis: the reduction of leverage, especially for the borrowers whose problems were painfully exposed by the crisis; the correction of macroeconomic imbalances. East Asia’s relative resilience to the subprime crisis has highlighted that whereas the form of the crises may change their essence remains the same. The lesson that East Asian countries offer to other countries is that strong economic fundamentals are essential tools in ensuring a healthy economic and financial system.